[Congressional Bills 116th Congress]
[From the U.S. Government Publishing Office]
[S. 2383 Introduced in Senate (IS)]
<DOC>
116th CONGRESS
1st Session
S. 2383
To establish minimum standards of disclosure by franchises whose
franchisees use loans guaranteed by the Small Business Administration.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
July 31, 2019
Ms. Cortez Masto introduced the following bill; which was read twice
and referred to the Committee on Small Business and Entrepreneurship
_______________________________________________________________________
A BILL
To establish minimum standards of disclosure by franchises whose
franchisees use loans guaranteed by the Small Business Administration.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Small Business Administration
Franchise Loan Transparency Act of 2019''.
SEC. 2. FINDINGS; PURPOSE.
(a) Findings.--Congress finds that--
(1) franchise businesses represent a large and growing
segment of the retail and service businesses of the United
States and are rapidly replacing more traditional forms of
small business ownership in the economy of the United States;
(2) the Small Business Administration guarantees much of
the financing available in franchising;
(3) the Small Business Administration requires pro forma
projections, including projected revenue, for the first year of
operations of a franchise as part of the standard operating
requirements for a franchisee to qualify for financing;
(4) on July 13, 2011, the Office of Inspector General of
the Small Business Administration published an audit (Report
No. 11-16) on loans made under section 7(a) of the Small
Business Act (15 U.S.C. 636(a)) (in this section referred to as
``7(a) loans'') to Huntington Learning Center franchises where
first year revenue projections were all significantly inflated;
(5) on July 2, 2013, the Office of Inspector General of the
Small Business Administration published an audit evaluation
(Report No. 13-17) showing that the Administration needed to
improve the management of the 7(a) loan portfolio risk,
specifically with certain franchise brands that had
exceptionally high default rates that continued to receive
guaranteed loans from the Administration;
(6) in September 2013, the Government Accountability Office
published a study (GAO-13-759) showing that over the 10-year
period from 2003 to 2012, 28 percent of 7(a) loans provided to
franchises required a guarantee payment;
(7) the study described in paragraph (6) was based on
32,323 loans totaling $10,600,000,000, which required
$1,500,000,000 in guarantee payments;
(8) the report for the study described in paragraph (6)
stated, ``Potential franchisees should include first-year
revenue estimates in their SBA loan applications. However, this
information is not necessarily available to potential
franchisees in the franchise organization's disclosure
document.'';
(9) franchise companies most often collect royalties based
on gross revenue, therefore revenue data on each franchise
outlet are readily available; and
(10) while both the franchisor and the lender profit as a
result of financing from the Small Business Administration, the
total liability for the loan is born by the franchisee.
(b) Purpose.--The purposes of this Act are to--
(1) ensure transparency in the loan processes of the Small
Business Administration so that the franchisee borrower, the
lender, and the Administration all have access to information
that is key to the lending process;
(2) lower the fees and rates charged to franchisee
borrowers; and
(3) help ensure lower default rates in order to make more
money available for loans to viable franchise brands.
SEC. 3. DEFINITIONS.
In this Act--
(1) the term ``disclosure document'' means the disclosure
document required to be furnished by a franchisor to a
prospective franchisee under section 436.2 of title 16, Code of
Federal Regulations, as in effect on July 1, 2007;
(2) the term ``Financial Performance Representation
Commentary'' means the Financial Performance Representation
Commentary adopted by the North American Securities
Administrators Association on May 8, 2017; and
(3) the terms ``franchise'', ``franchisee'', and
``franchisor'' have the meanings given those terms in section
436.1 of title 16, Code of Federal Regulations, as in effect on
July 1, 2007.
SEC. 4. REQUIRED DISCLOSURES.
(a) In General.--Subject to subsection (b), a franchisor, except
for a franchisor of a franchise in the lodging industry, that qualifies
for guaranteed lending from the Small Business Administration for the
franchises of the franchisor shall, at a minimum, disclose in the
disclosure document required to be furnished by the franchisor to any
prospective franchisee the following information for each of the 3
years preceding the date of the disclosure document:
(1) The average and median first-year revenues for all
businesses operated under franchises granted by the franchisor,
in accordance with the Financial Performance Representation
Commentary.
(2) The total number of businesses operated under
franchises granted by the franchisor that, during the first
year of operation, either--
(A) ceased operations; or
(B) were transferred to a new franchisee.
(3) The average and median revenues for all businesses
operated under franchises granted by the franchisor, in
accordance with the Financial Performance Representation
Commentary.
(b) Limitation.--A franchisor may not disclose to a prospective or
current franchisee, directly or through a third party, any information
relating to revenue that conflicts with the information relating to
revenue provided under subsection (a) in a disclosure document unless
the relevant franchise purchase includes 1 or more businesses under the
relevant franchise that are in existence on the date on which the
disclosure is made, in which case the franchisor shall disclose to the
prospective or current franchisee the relevant information relating to
revenue as of the date on which the disclosure is made with respect to
those businesses.
SEC. 5. ENFORCEMENT.
The Administrator of the Small Business Administration--
(1) shall enforce the requirements under this Act; and
(2) may hold a franchisor liable for the balance of any
loan obtained through a violation of this Act.
SEC. 6. NO PREEMPTION.
Nothing contained in this Act shall prohibit an authorized State
official from proceeding in State court on the basis of an alleged
violation of any civil or criminal statute of that State.
SEC. 7. SEVERABILITY.
If any provision of this Act or any application of this Act to any
person or circumstances is held invalid, the remainder of this Act and
its application to any person or circumstance shall not be affected
thereby.
<all>